Shares of Sirius Minerals (LSE: SXX) are currently trading at 18.25p, compared with a high of 45.5p last August. Back then there were 2.3bn shares in issue, giving the company a market cap of just over £1bn. Today, there are 4.2bn shares in issue, making the market cap £767m.
So, Sirius is now better value than back in August, albeit not by as much as the difference in the share price might suggest, due to the rise in the number of shares in issue.
Today, I’m looking at the question of where Sirius will be in 10 years time and asking whether the company is a top buy for long-term investors at that price of 18.25p and market cap of £767m.
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Landmark year
According to Sirius’s schedule of mine construction and production ramp-up, 2027 will be a landmark year, the first in which the mine delivers the targeted full volume of 20m tonnes per annum (Mtpa).
Based on a polyhalite price of $150 per tonne (about the price the company’s current offtake agreements have been struck at), revenue in 2027 would be $3bn (£2.4bn at a current exchange rate of $1.25 dollars to £1). Earnings before interest, tax, depreciation and amortisation (EBITDA) would be around £1.9bn at a margin of 78%.
By this time, we might expect the more expensive mine construction financing to have been replaced by conventional bank debt and Sirius’s net debt/EBITDA ratio to be down to around two times. Dividends may have started or be in the pipeline.
Share price in 2027
So, what of the company’s valuation and share price in 10 years’ time? An enterprise value (EV, which is market cap + net debt)/EBITDA multiple of 10 would not be unreasonable. This would make EV £19bn (market cap £15.2bn + net debt £3.8bn)/EBITDA £1.9bn. Shares in issue could be around 5.6bn by this time, implying a share price of 271p — a 15-fold increase on today’s 18.25p and a compound annual growth rate (CAGR) of over 30%.
Of course, these calculations could produce very different returns, depending on the inputs. Volume might not reach 20Mtpa, the polyhalite price might be higher or lower than $150 per tonne, the exchange rate might be very different and so on.
On balance though, I think my numbers are reasonable and with a CAGR of over 30%, there’s room for the numbers to be poorer than I’m expecting and for Sirius to still deliver a reasonable investment return.
The big risk en route
Aside from where Sirius might be in 10 years time, there are also the risks involved in getting there. Plenty of big mining projects come in on time and on budget but equally, plenty overrun. While Sirius is confident it can deliver and has allowed itself some leeway in the financing to do so, a major setback on time and costs could lead to the company having to raise more equity and therefore diluting shareholders beyond the level I’ve envisaged.
All in all, I continue to see Sirius as a risky but potentially highly rewarding proposition for long-term investors, simply because it is a unique long-life asset. And at 18.25p there’s a decent margin for things to go a fair way off-plan and the company to still deliver a reasonable return.
